Business Ethics
What it is and how its consideration during rebuilding situations can positively impact our clients.
Business ethics is defined as the study of appropriate business policies and practices regarding potentially controversial subjects including, but not limited to, corporate governance, fiduciary responsibilities, corporate social responsibility, and more.1 Business ethics are often viewed as a basic guideline that businesses follow to direct their decision-making during business operations in order to gain trust with business partners and customers. While laws and regulations (and even business best-practices) are often intertwined with business ethics, business ethics is less about a specific “right versus wrong” framework and more of a broader category that is meant to act as a guiding principle for decision making.
While business ethics may seem like a commonly understood concept to many, there are certain traps that can lead members of an organization towards behaviors that are less ethical. Once these are understood, actions can be taken by an organization to lower the likelihood of unethical behaviors.
In their book “The Ethical Executive,” Robert Hoyk and Paul Hersey discuss forty-five psychological traps that can lead to unethical behavior.2 As referenced above, by understanding and being aware of these traps, an individual is able to better identify when a trap is present and then act accordingly. Please see below for a brief description of two of the most relevant traps discussed in the book. The first is “time pressure” which is most likely relevant during the early stages of a rebuilding period whereby business concerns are focused on daily operations and near-term issues. The second is “competition” which is most likely relevant during the middle stages of a rebuilding period whereby management is establishing longer-term processes and culture.
Time Pressure: While many may feel that they strive under pressure, time pressure generally leads to a minimization of ethical awareness. Robert Hoyk and Paul Hersey highlight an example illustrating this whereby participants in a study were told to walk from one area of a building to another area of a building. Related to the walk, each test participant was given one of three messaging: a low-hurry messaging, an intermediate-hurry messaging, or a high-hurry messaging. On the walk over, the test participants passed a victim visibly in need of assistance. The study showed that not only were the test participants that were in more of a hurry less likely to stop and assist the victim but, based on questionnaires following the study, the hurried test participants were also less likely to be aware of the victim (and its ethical implications) during their walk.
Restructuring Example: Responses to time pressure in the business world often have direct negative implications to a company’s financial performance – “getting it done” and “doing it right” sometimes are at odds with each other when time is short. Examples include: 1) taking short-cuts to close the books at month end; 2) not following up on variances or discrepancies in financial reports or data; and 3) continuing with bad processes because it would take more time in the short run to fix the issue.
Silverman Tip: When working with a client, it is important for management to take a moment and consider whether quick decisions being made are aligned with high business ethics. Receiving feedback from other team members (or trusted third parties) that are not experiencing the same time pressure as management can act as a good check on high business ethics.
Competition: While competition between companies is often viewed favorably because it leads to better quality products at lower pricing, competition within companies can have unintended consequences. Robert Hoyk and Paul Hersey highlight the company Enron as an example of a company culture that propagated internal competition. This environment culminated in a bi-annual employee evaluation in which employees were ranked amongst their peers on a scale of 1 (worst) to 5 (best). Managers within Enron were expected to assign a certain percentage of their subordinates each evaluation period to a ranking of 1, which meant that these employees would be terminated. In doing so, the company created an environment whereby employees feared for their job and saw co-workers as competition rather than as team members. The result was that employees, rather than working in a collaborative, team-oriented manner, would actively work to discredit the ideas or suggestions of other employees to make themselves look better. This behavior led to sub-optimal decision making across the company.
Restructuring Example: We see this dynamic often at clients between departments: Purchasing blames Sales for poor forecasting leading to too much inventory, Accounts Payable blames Accounts Receivable for not collecting cash leading to credit problems, etc. Whatever the reasons for underperformance, simply blaming or undermining another department isn’t productive. In these examples, there are almost always multiple causes of the root problem and focusing blame on a single department means that issues at other departments are ignored.
Silverman Tip: When working with a client, it is important for management to maintain a team-oriented culture in which competition is expressed outwardly, rather than inwardly. This focus is particularly important when establishing employee evaluation frameworks, incentive structures, and culture.
In addition to the above potential traps that generally lead to unethical behavior, there are also so-called defensive traps that generally occur after an unethical behavior has occurred (and can be used to rationalize or cope with guilt). As described by Robert Hoyk and Paul Hersey, one of the most common ways to reduce guilt is through minimizing, which is a practice that makes unethical behavior seem smaller than it really is. Some examples of minimizing tactics are described below.
Reduction Words: This is the practice of using specific wording to minimize unethical behavior. For example, the following words are often considered reduction words: just, once, sort of, at most, merely, etc.
Renaming: This is the practice of using benign words to replace words that have negative connotations.
Advantageous Comparison: This is the practice whereby an individual who’s acted in an unethical behavior will compare their actions against an individual that has done something materially worse.
Zooming Out: This is the practice of comparing an unethical behavior with a much bigger picture to contrast the size of the unethical behavior.
When going through an active rebuilding period, stresses within a company can be high amongst both company management and the employee base. We can act as an unbiased, third-party to help our clients (i) make daily decisions that are aligned with high business ethics and (ii) create processes that foster a commitment to high business ethics.
1 Based on information sourced from Investopedia.com (https://www.investopedia.com/terms/b/business‐ethics.asp#toc‐what‐isbusiness‐ethics)
2 “The Ethical Executive: Becoming Aware of the Root Causes of Unethical Behavior: 45 Psychological Traps That Every One of Us Falls Prey To,” written by Robert Hoyk and Paul Hersey (2008)